The economic system operating in your country has implications for you as an investor… Because the economic system governs what the country uses the available resources for and which goods and services they produce. And this influences your investment decisions… Let’s take a closer look at the two types of approach a country can take with resource allocation, namely a market approach or a command approach…

The way an economy goes about allocating scarce resources lets us draw a distinction between different types of economic system.

In a centrally planned economy, or a command economy, a central authority (usually the state) makes most of the key decisions about how to allocate resources.

In a free market or capitalist economy, this happens through the market forces of supply and demand.

How does a command economy work?

In a command economy, the state usually controls or owns resources.

They set priorities for their use… They also set production targets for firms. And they own those firms, too.

A command economy is a key feature of a communist society.

China, North Korea, Cuba and the former Soviet Union are all examples of command economies.